Suppose OPEC decides to halve oil production suddenly. In the graph to the left,
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Question
Suppose OPEC decides to halve oil production suddenly. In the graph to the left, please show the effect this will have on SRAS and AD. In the graph to the right, please show what will happen to the short-run Phillips curve.
Suppose OPEC decides to halve oil production suddenly. In the graph to the left, please show the effect this will have on SRAS and AD. In the graph to the right, please show what will happen to the short-run Phillips curve. 110 109 108 107 106 105 104 103 102 101 100 10 SRAS Or 2 AD Phillips Curve 0 246 8 10 12 14 16 18 20 Quantity of Output (thousand) 0 1 23 4 5 6 7 89 10 Unemployment Rate (%) If policy-makers choose to contract AD in response to OPEC's actions: O Inflation will increase Unemplovment will increase O O Unemployment will increase Inflation and unemployment will increase Changing AD will not change anythingExplanation / Answer
Answer to part 1.
In the graph to the left, Aggregate Demand (AD) stays put. There will be no change in its position. But the Short Run Aggregate Supply (SRAS) curve shifts to the left. As the production is halved, aggregate supply decreases and hence the curve shifts to the left.
In the graph to the right, because of a fall in Aggregate Supply, Philips Curve shits upward and to the right indicating that there is a rise in unemployment and inflation.
Answer to part 2. (MCQ question)
If policy makers choose to contract AD, unemployment will increase. Here, assuming that supply has fallen and will remain so, a contraction in AD will cause a downward movement.
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